Rights of a Surety Under Indian Contract Act

A guarantee contract is a contract that discharges another person's (third party's) liability in the event of that third party's default. A surety is the party to the contract who offers the guarantee and is bound to pay the amount if the borrower fails to do so. That means that if the primary debtor defaults, the creditor recovers from the surety. The creditor is the one who gives the money to the debtor. In fact, the person to whom the guarantee is given is referred to as the "primary debtor." This gave birth to surety rights.

For example, if the principal debtor defaults on paying a debt of Rs. 20,000, the creditor may seek this payment from the surety.

Who is Surety?

Surety is a person who comes as a guarantee to the payment of the amount borrowed by the principal debtor to the creditor in a guaranteed contract. This means that if the debtor fails to pay, the surety must. As a result, they are equally liable to the creditor and the principal debtor.

And also, when the creditor files a suit against the principal debtor and the debtor is dismissed for defaults, The principal debtor's liability is then discharged, and the surety's liability is likewise discharged automatically.

What are the Liabilities of Surety?

Unless otherwise specified in the contract, the surety's liabilities in a guaranteed contract are co-extensive with those of the debtor. This means that if the debtor defaults, the creditor can recover the amount from the surety that was initially to be discovered from the principal debtor. Also, if the lead debtor is dismissed from their defaults, The surety's liability is then automatically terminated. This back and forth between surety and liability gave rise to surety liabilities and rights.

Rights of a Surety

A guarantee contract is one where a third party agrees to perform a promise or discharges its liability if the other party refuses to do so. In a Contract of Guarantee, three parties are involved: the surety, who provides the guarantee; the person for whom the guarantee is issued; and the person to whom the guarantee is given, called the creditor. In a guarantee contract, the surety has three types of rights that may be defined as follows −

• Rights against the Principal Debtor.

• Rights against the Creditor.

• Rights against the Co-sureties.

Let’s discuss each one of them separately in brief −

Rights of the Surety against the Principal Debtor

It includes −

Rights of surety on payment or performance

Section 140 of the Indian Contract Act of 1872 discusses the surety's rights in the payment or performance of a guarantee contract. It states that if the guaranteed debt has become due or the principal debtor has defaulted, the surety is entitled to all of the rights that the creditor had against the principal debtor upon payment or performance of all that he is liable for. In Babu Rao Ramchandra Rao v. Babu Manaklal Nehmal case, it was held that if the surety's liability is coextensive with that of the primary debtor, his right is not less coextensive with that of the creditor once the creditor's debt is satisfied.

Implied promise to indemnify surety

Section 145 of the Indian Contract Act of 1872 discusses the implied promise to indemnify the surety. Every contract of guarantee contains an implied guarantee by the primary debtor to indemnify the surety for all costs rightfully paid to the creditor under the contract, but not for any sums wrongfully paid. In Shri Bisiowakarma Furniture Workshop v. Santanu Sarkar, (2006) case, the surety paid off the creditor and was allowed to recover his indemnity, including interest, on the principal. He could not prove the principal's claim that he had agreed to pay without any such claim.

The surety also has the right to give the principal debtor notice to settle all of his debts with the creditor if the latter comes to the Surety for money. Similarly, the surety has the right to ask for relief, and from the date of the guarantee, the surety can apply pressure on the primary debtor in connection with debt settlement.

Rights of the Surety against the Creditor

It includes −

Surety’s right to benefit of creditor’s securities

Section 141 of the Indian Contract Act of 1872 covers the surety's right to benefit from the creditor's securities. It states that the surety is entitled to the benefit of any securities held by the creditor against the primary debtor at the time the suretyship contract was entered. It doesn't matter whether the surety was aware of the existence of the securities; moreover, if the creditor loses without the surety's consent, the surety is discharged for the amount of the security's value.

Right to set off

If the creditor sues the surety, the surety may be entitled to the benefit of any set-off that the primary debtor has against the creditor. This means that the surety has the right to use the debtor's defenses against the creditor.

Rights of Surety against Co-sureties

Co-sureties are two or more people who provide a guarantee for the same debt. They are all equally liable to the creditor for the repayment of the loan. The following are the rights of one co-surety against the other co-sureties −

• Right to Contribute Equally

• Liability of Co-sureties Bound in Different Sums

Right to Contribute Equally

If two or more people are co-sureties for the same debt, whether jointly or severally, under the same or different contracts, and with or without each other's knowledge, the co-sureties are obligated to pay each an equal share of the total debt, or that part of it which remains unpaid by the principal debtor, in the absence of any contract to the contrary.A single co-surety can sometimes discharge all obligations. In such cases, he may be able to get an equal contribution from the other co-sureties.

Liability of Co-Sureties Bound in Different Sums

If the co-sureties are bound in different sums, they must pay equally but not more than the total amount guaranteed by each of them.

Conclusion

A surety is a person who steps forward to pay the money if the borrower fails to do so. In the case of a creditor's decree against the major debtor, the decree's wings can be extended against the sureties as their liability is coextensive with the principal debtor. Unless otherwise stated in the contract, the surety's liability is co-extensive with that of the primary debtor. A surety has rights against the primary debtor, creditor, and co-sureties.

Frequently Asked Questions (FAQs)

Q1. What is the Surety Indian Contract Act?

Ans. The person who gives the guarantee is termed the 'surety," the person in respect of whose default the guarantee is granted is called the 'principal debtor', and the person to whom the guarantee is issued is called the 'creditor'. A guarantee might be oral or written.

Q2. What is the right and liability of surety?

Ans. Surety promises the creditor that if the principal debtor defaults, they will discharge the third party's liability or fulfill the principal debtor's promise. As a result, the surety assures the creditor of the principal debtor's act.

Q3. What are the rights and duties of an indemnified and surety?

Ans. After the settlement, the indemnifier has the right to obtain title to the items and sue the third party for damages. It is the duty of the indemnifier to indemnify the promisee against any damages, costs, and sums in any suit resulting from a matter in which the former promised to indemnify the latter.